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ECON 160 Week 13 Monopoly: Price Searcher Chapter 15 $Price Demand Facing the Firm Demand $10 9 8 7 6 5 4 3 2 1 D 1 2 3 4 5 6 7 8 Qty/T Total Revenue $Price Demand $10 9 8 7 6 5 4 3 2 1 D 1 2 3 4 5 6 7 Qty/T Marginal Revenue =Additional Revenue $Price Demand $10 9 8 7 6 5 4 3 2 1 D 1 2 3 4 5 6 7 Qty/T Marginal Revenue $Price Demand D MR Qty/T $Px Marginal Revenue & Elasticity of Demand $ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1 Ed > 1 Ed = 1 Ed < 1 Demand x 1 2 3 4 5 6 7 8 9 10 Qtyx /T Marginal Revenue Monopoly Output $Price Demand MC Pm Mc D MR Qm Qty/T Market Power: No Close Substitutes $Price MC Demand Pm Mc D MR Qm Qty/T Market Power: Few Close Substitutes $Price MC Demand Pm Mc D MR Qm Qty/T Market Power: Many Close Substitutes $Price Demand MC Pm D Mc MR Qm Qty/T Price Taker: No Market Power: Many Identical Substitutes $Price MC Demand P = MR P = Mc Qm Qty/T Monopoly Profit? Demand MC Pm AC Profit D MR Qm Qty/T Response to Profits • New firms enter with similar products • Demand declines and becomes more elastic • Price falls, output falls and profits decline Effect of Competition $P MC D AC Pm D MR Qm Qty/T Monopoly Efficiency Loss ? $Price Demand MC Pm Pc? D MR Qm Qc? Qty/T Sources of Monopoly • Natural Monopoly • Patents • Firm actions – Legal harassment – Exclusive licensing – Bundling Solutions • Government Price regulation • Enforcement of Anti-Trust Laws • Price Discrimination Price Discrimination • Charging different prices for different units sold. • Allows firms to increase sales and capture more of consumer surplus. Monopoly Pricing: Single Price $ Price Demand Pm Marginal Cost MR Qm Qty/T First Degree: Charging different customers different prices. (i.e. moving down the demand curve) • Auction Monopoly Pricing: First Degree $ Price P1 P2 P3 P4 P5 P6 Demand Marginal Cost Q1 Q2 Q3 Q4 Q5 Q6 Qty/T First Degree: Charging different customers different prices. (i.e. moving down the demand curve) • Auction • College scholarships First Degree: Different Prices for different buyers $ Price Demand Scholarship Amount Tuition Marginal Cost MR Qm Qty/T First Degree: Charging different customers different prices. (i.e. moving down the demand curve) • • • • • • • • • Auction College scholarships IBM Punch Cards Polaroid Camera & Film Xerox copier & Toner Ink Jet Printers & Cartridges Razor handle & Blades Swiffer handle & Pads Glade Plugins & refills Second Degree: (Quantity Forcing) • Offering a schedule of prices to all buyers, which successively lowers the price for additional units, purchased (Moving down each buyers individual demand) • Tires: buy 3, get 4th free. • Family Gym membership • Product prices, (Drinks, coffee, cereal, toothpaste) – medium16 oz. $ 1.09, .07/oz. – large: 22 oz. $ 1.19, extra 6 oz. @ .02/oz. – extra large:32 oz. $1.29, extra 10 oz. @ .01/ oz. Third Degree: Charging different prices to different groups according to different elasticity of Demand. Third Degree: Identify Sub-groups A Market B P P P Pb Pm Pm Pm Da Pa MC MR Db Qm Qa Q/t Qb Qm Q/t Qm D Q/t Third Degree: Charging different prices to different groups according to different elasticity of Demand. • • • • • • • • • Grocery coupons Theaters Airlines & Hotels Newly released unique products (Segway) Prescription drugs in different countries. Brand name mixers (Holiday Sale) Mattresses: Match any advertised price Menu (Freeway) Menu (Chinese) Necessary Conditions for Successful Price Discrimination • Ability to identify and separate buyers by elasticity of demand. • Collect different prices from the different buyers • Prevent Resale